‘When I started out the aim was to keep it simple: buying companies with the prospects to grow their earnings and ideally at low valuations. That’s the consistency running through the last 10 years,’ Norris (pictured) says. ‘Sometimes it work better than others, but we have outperformed in eight of the last 10 years. Unfortunately, this is one of those years where we have underperformed.

‘My style of running money tends to have high tracking error – I’ve never been afraid to ignore parts of the market, like banks – but low standard deviation and beta, so the fund has high relative risk but low absolute risk.’

Norris started out in the tail-end of the recession following the dotcom crash, but by March 2003 the bull run kicked in, although he says it was not readily apparent who the winners and losers were until 2004.

‘You could see it was very much going to be a cycle where a weak dollar, Chinese industrialisation and emerging market growth were going to be narrative,’ he says. ‘Capital was readily available and what we basically saw was that pretty much every company on the market was able to grow their earnings.

‘The spectacular bull market for corporate earnings between 2003 and 2008 meant that the valuations of the cheapest and most expensive stocks converged, because if everyone is growing you do not need to pay a premium for growth.’

He says the fund was biased towards stocks with exposure to emerging market growth, such as commodities, and this theme continued to be profitable through 2005 and 2006.

By 2007, he felt the theme was growing stale and Chinese industrialisation had been compressed into a few years rather than being the long-term theme many anticipated.

‘In 2008 at the end of the cycle you didn’t really want to be in any stocks, but in 2009 we saw a spectacular change,’ he says. ‘We identified by mid-2009 (sadly, not in March) that the leading economic indicators were turning. You could buy some fantastic cyclical companies that normally earn 10% margins on 1%–2% margins or even losing money. When we got that V-shaped recovery in the economy and earnings you would make a lot of money.’

He describes the bounce-back as one of the most fun times he has had as a manager, having his best ever quarter in Q3 2009 with the fund up 20%.

US renaissance

Norris describes 2010-11 as a ‘mid-cycle lull’ and he now believes we are moving into a new cycle that will be characterised by a US renaissance over the next five years.

He believes the capital markets will also have a big say in the winners and losers over this period. Those with access to cheap finance that already have dominant market share will grow their share of the market still further from rivals, in what will be a low-growth environment.

He cites Volkswagen as an example. It owns Audi and Porsche, two of the most profitable autos, while its own branded cars have grown market share from 20%-25% since the financial crisis.

‘Volkswagen can borrow at a 100 basis points (bps) spread whereas Peugeot and Fiat are paying 700bps, so Volkswagen is able to give its customers much more attractive financing deals,’ he says.

He adds that many of these market leaders, in which he also includes Nestlé, which is trading at 16 times and Seadrill and Ryanair which both trade at 12 times and match the market level.

Norris believes this stock trio has the potential to trade at 30 times at the end of the cycle as the premium paid for quality companies is actually not as high as is commonly perceived.

‘The cycle will be dominated by mega caps and we are holding more of these stocks than we ever have,’ orris says. ‘Chasing growth in small and mid caps will be very high risk.’

'In 2004, I invested in Frontline, which is an oil tanker stock run by John Frederiksen, Norway’s richest man. He has been the most impressive entrepreneur in Europe for years and spotted the rise of emerging market industrialisation early. He recognised there was massive growing demand for shipping and not enough supply. He was intelligent and knew that the story wasn’t going to last forever so he paid out a lot in dividends. We sold in 2006 and within the time we held we made 300% in capital growth and another 300% return in terms of the dividends it paid out.'

'It is based in Sweden and did okay last year but then ran into production issues. The management was consistently over-optimistic and very aggressive in terms of funding the company without necessarily communicating that risk to investors. We invested because on paper, the gold price was high and you could see good earnings momentum and the opportunity to make a lot of money. A lot of people have been burnt in gold mining stocks and we sold out in the summer and lost 70%. It has gone down another 80% since we sold it.'

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